Brexit and Inertia

I’m having to reconsider my fondness for an aphorism from Dune: “Then, as his planet killed him, it occurred to Kynes that his father and all the other scientists were wrong, that the most persistent principles of the universe were accident and error.” Based on Brexit and Covid-19, inertia needs to be added to that list.

What happened this week on the Brexit was sufficiently predictable that the UK press treated it as a secondary story. Michel Barnier and David Frost had Brexit talks this week. Nothing changed on the big substantive issues, the “level playing field” which means not allowing the UK to undercut EU standards on goods it sells to the EU, and fisheries, which is proving to be more intractable than some had assumed early on. The EU has at least said it gets it gets less fish from UK waters, but no fish isn’t acceptable.

Things are so bad that the UK had to point out that the negotiations had not broken down. Informal talks are set to continue next week. But the UK hasn’t just missed Boris Johnson’s much bruited about end of July deadline. Barnier, who has made a point of being measured, deemed the odds of reaching an agreement as “unlikely”. Frost was more upbeat, confirming the two sides are far apart but maintaining it was still possible to come to an understanding by September.

It’s also possible for me to win the Lotto….assuming I buy a ticket.

The UK actually made a concession it was going to have to swallow regardless to get a deal done: that of not having a series of sectoral mini-deals but an overarching deal. The UK is now willing to enter into a biggish agreement but still wants separate pacts on aviation, air transport, and civil nuclear co-operation. The EU also allegedly conceded on the ECJ not having any authority over UK domestic matters. Yet Frost oddly whined again that the UK wanted a Canada-style deal and why wasn’t the EU prepared to give that, when the EU has already made “What about ‘no’ don’t you understand” equivalent statements on that topic.

Despite the UK putting a more positive official spin on the state of play than the EU, the leaks tell another story. The Telegraph reported on Wednesday that the Government anticipates the UK will trade on WTO terms, as in not reach an agreement. The next day, it reconfirmed: UK to offer emergency Brexit talks, with ‘EU to blame’ if trade deal collapses: The Telegraph has revealed that Government assumption is now that Britain will have no trade deal in place when transition period ends.

Oh, and remember that great UK-US trade deal that was going to render a pact with the EU moot….despite the fact the US would never account for as much UK trade as much closer Europe? That agreement isn’t going so well either. From the Financial Times on Wednesday:

The UK government has abandoned hopes of reaching a trade deal with America ahead of the US presidential election in November, with British officials blaming the Covid-19 pandemic for slow progress…

Last September government officials told The Sun newspaper that a deal would be wrapped up by July 2020. “The political will is there now on both sides to do the deal by July,” one said at the time. “It’s a great win for us.”

Even in January this year aides were still confident that there could be an outline agreement by midsummer.

But last month there was a shift in the government’s language, with [international trade secretary] Ms [Liz] Truss telling MPs the government was “not going to rush into a deal and there is no deadline”.

Even though Covid-19 is a convenient scapegoat, the article makes clear there are serious issues to be resolved, like US agricultural good access to the UK market (no chlorinated chicken!) and protecting the NHS (no US privatization). This is consistent with what we’d warned. Yes, the US regularly does bi-lateral trade deals in less than a year….because it dictates terms and allows for negotiations only at the margin. Donald Trump was almost licking his chops when the talked about giving the UK a “great” trade deal. He read Johnson as in need of a fast deal to create the appearance of momentum, which would give the US even more leverage. But British farmers and MPs, who have to approve the deal, made a stink. And someone on the UK side apparently ran some numbers. Again from the Financial Times: “Leaked government forecasts suggest a trade deal with the US could benefit UK economic output by about 0.2 per cent in the long term.”

How about Japan? A note in the Financial Times on the 14th said the stipulated timetable meant the two sides had only 2 1/2 weeks to settle the main terms if they were to get done by year end. Japan wants tariff cuts, particularly zero on cars, an investment protection provision and a digital trade agreement. Japan is clearly using the UK’s sense of urgency to Japan’s advantage. From the Financial Times:

The deal will also be conspicuous for what is not in it. [Lead negotiator Hiroshi] Matsuura said the shortness of time meant both sides would have to “lower their ambitions”. In practice, that is likely to mean there is nothing much in areas of UK trading strength such as legal and financial services. It will certainly mean zero quotas for UK exports in sensitive areas such as agriculture — it is up to London to argue with the EU for a share of its existing quota for barley or cheese. “Why should we give now to a country that doesn’t have real agricultural access in Japan?” said a participant.

The ace in its hand, Japan believes, is rules of origin. “With 28 countries, the rules of origin worked very much in favour of the 28,” said a participant. Under the EU-Japan deal, parts originating anywhere within the EU counted for the purpose of reduced tariffs; unless Japan agrees that can continue then, for example, Scotch whisky in a bottle from France might not count as a UK product. “The UK has a very integrated supply chain with Europe,” said a participant. Tokyo is betting that London will want that to continue.

PlutoniumKun has said Brexit has a 1914, sleepwalking into a disaster feel to it. I can’t comprehend how the powers that be in the UK are so complacent. The UK business community was evidently too cowed to speak up and seems to regard itself as still powerless. The public appears to have woken up to the fact that the miasma of what Brexit might be has coalesced into the Ultra’s version, which polls now show gets 60/40 opposition. Yet the Government doesn’t care, secure in the Fixed Term Parliament Act difficulty of ousting it. And is Johnson unconcerned about his legacy? Overly confident in some sort of Singapore on the Thames personal enrichment opportunity? So self deluded that he still believes what he is selling?

We commented some time ago on Brexit being a game of chicken. The UK is now past the point where it can change its trajectory. The best it can pull out of this mess is a bare bones tariffs and quotas deal, and that will only soften the shock a bit.

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